The Dividend Kings are an elite group of stocks that have amassed a dividend growth streak of at least 50 years. Membership within this group is so exclusive that just 40 companies have earned the title of Dividend King.
Each of these companies has a business model that has led to sustained success, allowing for dividend growth to occur for at least five decades.
Along with sturdy business models and enviable dividend growth track records, many of these stocks also offer the potential for high rates of total return.
This article will examine the three Dividend Kings that we project will offer the largest total annual returns over the next five years. These three stocks are:
- PPG Industries (PPG)
- 3M Company (MMM)
- Stanley Black & Decker (SWK)
The stocks are listed in order of 5-year expected annual returns, from lowest to highest.
Dividend King #3: PPG Industries
Our thirdanked Dividend King for total returns is PPG Industries, a leading paint, and coatings company. The almost $31 billion company generates annual revenue of close to $18 billion.
The company was founded in the 1880s has become one of the top names in its industry, with only a few peers that can match its size and scale. PPG Industries has operations in more than 70 countries, evidence of its global reach.
The company created a firm position for itself due to the strength of its brands and the trust it built with customers.
This strength helped PPG Industries overcome a 30% increase in raw material costs in the most recent quarter. As a result of the surge in commodity costs, PPG Industries raised prices in all of its business segments and suffered just a slight decrease in volume. However, higher prices haven’t been a major headwind to results as customers are willing to pay more for PPG Industries’ products.
As a result of the recent performance, we remain confident that PPG Industries will see earnings-per-share grow at 8% annually through 2027.
PPG Industries has leveraged its robust business model to return capital to shareholders through dividends. Following a 9.3% increase for the September 10, 2021 payment, the company reached the requisite 50 years of dividend growth to gain entrance into the Dividend Kings.
The most recent raise was also ahead of the 10-year compound annual growth rate of 7.6%. As a result, shares yield 1.8% at the moment, above the 1.4% average yield of the S&P 500 Index.
We expect PPG Industries to earn $8.12 per share in 2022, a 20% increase from the previous year. Currently, shares are trading at 16.1 times our expected earnings-per-share for the year. We have a 2027 target price-to-earnings ratio of 19 for the stock, which is slightly below the long-term average. If the stock reaches our valuation target, this implies an annual benefit of 3.3% due to multiple expansions.
Therefore, we project that PPG Industries will return 13% annually over the next five years. Our forecast stems from an 8% earnings growth rate, a 1.8% starting dividend yield, and a low single-digit contribution from multiple expansion.
Dividend King #2: 3M Company
Our second-highest total annual return among the Dividend Kings belongs to 3M, a leading industrial conglomerate. The $86 billion company had more than $35 billion in sales in 2021.
3M is composed of four segments, including Safety & Industrial, Healthcare, Transportation & Electronics, and Consumer, that address needs in multiple areas of the economy. The company’s products are used in various settings, including homes, schools, office buildings, industrial sites, and hospitals.
This diverse product and customer type helped to provide 3M with some diversification in the face of challenges in any one area. For example, the healthcare business, especially those used in the treatment of Covid-19, helped offset weaker areas of the company last year.
3M also invests heavily in research and development, with close to 6% of annual sales being used to find new products for the company’s portfolio. As a result, 3M has more than 100,000 patents and receives nearly a third of annual revenue from products created in just the last five years.
We forecast that 3M will see 5% earnings growth per year through 2027, a slightly better rate than what the company has produced over the last ten years.
3M has raised its dividend for 64 years, one of the longest dividend growth streaks in the marketplace. However, the most recent raise was for a penny per quarter per share, or just 0.7%, a far cry from the dividend’s CAGR of close to 11% for the last decade. Still, shares yield 4%, almost three times the average yield of the market index.
3M is projected to earn $10.24 this year, resulting in a price-to-earnings ratio of 14.4. With a five-year target valuation of 19 times earnings, we believe that shareholders could see a 5.7% tailwind to annual results through 2027.
We forecast that 3M will see annual returns of 13.6% over the next five years. This estimate combines our 5% earnings growth rate, 4% starting yield, and a mid-single-digit contribution from multiple expansion.
Dividend King #1: Stanley Black & Decker
Our top pick for Dividend Kings for total returns is Stanley Black & Decker. The $24 billion power tools company has annual revenue of $15.6 billion.
Stanley Black & Decker is the world leader in power tools, hand tools, and related items. The company sells more tools and storage products than its peers, giving Stanley Black & Decker an unmatched reach.
Stanley Black & Decker has built its leadership position in its industry through well-known and trusted brands. This includes Stanley, Black & Decker, DeWalt, and Craftsman, among others. Customers have come to depend on these brands to meet their needs, so they are commonly placed in premium positions in home improvement stores.
Acquisitions have also been commonplace for the company. Stanley Black & Decker came to be because of the 2010 merger of Stanley and Black & Decker into a single company. More recently, Stanley Black & Decker added the iconic tool line Craftsman in 2017 and the remaining 80% that it didn’t own in MTD Holdings Inc, an outdoor power equipment company, in 2021.
The company’s earnings-per-share have a CAGR north of 10% over the last decade. We feel that earnings growth will be closer to 8%, which reflects the quality of the company but also takes into account the high starting base for earnings-per-share.
Stanley Black & Decker has raised its dividend for 54 consecutive years. The most recent increase of 12.9% for the September 21, 2021 payment date was the largest since 2012. In addition, the dividend has compounded at a rate of almost 6% since 2012. Stanley Black & Decker yields 2.2% today.
Shares trade at 11.9 times our expected earnings-per-share of $12.25 for 2022. Our 2027 target price-to-earnings ratio is 16.5. Reaching this valuation would add 6.7% to annual returns over this period.
In total, Stanley Black & Decker is expected to return 16.8% annually through 2027. This projection is due to 8% earnings growth, a 2.2% starting dividend yield, and a mid-single-digit contribution from multiple expansion.
Final Thoughts
Dividend Kings have proven business models that enable shareholder returns regardless of economic conditions. PPG Industries, 3M, and Stanley Black & Decker are our three top picks among this exclusive group for total returns.
Each company operates in a somewhat cyclical industry, yet all three have increased dividends for at least 50 consecutive years. These companies have accomplished this feat because they offer products and services that customers desire.
For investors looking for companies with long histories of dividend growth and the potential for mid-double-digit total returns, we believe they should consider PPG Industries, 3M, and Stanley Black & Decker.
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